Our Solution To Burger King-Style Abandonment Of U.S. Gains Traction

Amidst all the news about Burger King – another company renouncing its US “citizenship” to avoid paying taxes for the roads, courts, police and the rest of the government services that made them prosperous – an idea that Campaign for America’s Future has been promoting is gaining traction. The technical name for it is “Single Sales Factor Apportionment” but it just means tax companies based on how much they sell here.

In other words, instead of expecting companies to tell us how much profit they make inside and outside of the U.S., we’d just tax all companies – U.S. or not – based on what they sell here. So if a company makes 25 percent of its sales revenue here, we’d tax them based on 25 percent of their worldwide profits. This way it won’t do them any good to engage in schemes to make it appear as if their profits are made outside of the U.S., and it won’t do them any good to become non-U.S. corporations.

The good news is the tax inversion flap has generated some interesting ideas for broader changes in the way we tax multinational firms. One, raised in a July paper published in Tax Notes by Mike Udell and Aditi Vashist, would base a firm’s U.S. taxable profits on the U.S. share of its total worldwide sales.

Under such a system, called single sales factor apportionment, a multinational would report income for all its worldwide entities and be taxed on a share of its total worldwide profits. But the tax would be apportioned by the percentage of the firm’s worldwide sales that occur in an individual country. For instance, if half of a firm’s sales occurred in the U.S., half of its worldwide profits would be subject to U.S. tax. The levy would apply to all corporations, whether based in the U.S. or elsewhere.

Simplify accounting and reduce the burden of compliance on corporate taxpayers as well as administrators.

A key reason this idea will work is that companies have an incentive to accurately report their worldwide sales and worldwide profits: They need their shareholders to know these numbers and don’t want to underreport them – or executives won’t get their bonuses. Governments won’t have to worry about companies fudging the numbers so that they are not all getting the same, accurate information. This would align U.S. tax enforcement interests with corporate interests in putting their sales totals in the best possible light.

It also negates the incentives to renounce U.S. corporate citizenship, because they will pay the same amount in taxes whether they leave or not.

About Dave Johnson

Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.